Arena Got Taken

There's no delicate way to put this: Arena Pharmaceuticals (Nasdaq: ARNA  ) got a poor deal when it licensed its obesity drug lorcaserin to Japanese drugmaker Eisai yesterday.

I have no problem with Eisai as a choice; the company sells Aricept with Pfizer (NYSE: PFE  ) , and it's certainly large enough to get the job done. But the terms of the agreement are downright pathetic.

The measly $50 million milestone payment makes it pretty clear that Eisai is as worried about a potential approval as the rest of us. If the drug is approved, Arena is still only due "up to" $90 million. My guess is the "up to" implies that the milestone payment goes down if lorcaserin isn't approved on the first go-round.  Obesity is easily a multibillion-dollar market, with drugs like Abbott Labs' (NYSE: ABT  ) Meridia and GlaxoSmithKline's (NYSE: GSK  ) alli offering no real competition. So why do the milestones up to an approval only total $140 million?

What's it giving up? Arena has to pay the cost for manufacturing the drug, and will then capture a percentage of Eisai's net sales, which starts at 31.5% and steps up to a maximum of 36.5% on the portion of annual net sales above $750 million. Assuming a manufacturing cost in the low single digits, Arena will recognize about a little more than a quarter of net sales. By contrast, Gilead Sciences (Nasdaq: GILD  ) , which also sells small-molecule drugs, pockets more than 60% of its revenue after subtracting out manufacturing and all its selling, general, and administrative costs.

There are one-time payments worth a total $1.2 billion, triggered when annual sales reach a certain level. Arena wasn't specific about exactly how the one-time payments break out, except to say that the first one occurs when annual sales reach $250 million, and the last one happens if annual sales hit $2.5 billion. The total payments are $300 million for as much as $1 billion in sales, so it's fairly back-end weighted.

Investors seem to share my feelings for the uninspiring deal. Shares went up 15% yesterday, but that's pretty much an artifact of the low market cap that Arena has now. The company gained an extra $50 million in cash, and its market cap went up by about the same amount.

We'll have to see whether VIVUS (Nasdaq: VVUS  ) and Orexigen Therapeutics (Nasdaq: OREX  ) , fellow obesity-drug makers, can get better deals for their drugs, but Arena certainly hasn't set the bar very high.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer is a Motley Fool Inside Value pick. The Fool owns shares of GlaxoSmithKline and has a disclosure policy.


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  • Report this Comment On July 02, 2010, at 3:22 PM, AlanPithy wrote:

    ARNA got a very good deal. In fact it is such a good deal that if in year 2, 3, 4 or later the much anticipated "Lor-Phen" tablet creates sales of Lorcaserin to jump to $2.5 Billion that Eisai will be paying an effective royalty rate of around 73% that year. $1.1 billion in milestones plus 36.5% on the back $1.75BB on sales of $2.5 = over 70%.

    Ok granted that would be only for 1 year. But it would put about $2 billion into company coffers that year, and over $1 billion the year after and going forward should sales continue to be that brisk. That would amount to around 20 times today's market cap.

    The deal is better than the deal Gilead got for its first drug.

    The author also failed to point out that this has to be framed on a backdrop of what ARNA wanted. ARNA wanted to continue making the drug. And this deal only covers the USA. ARNA is free to sell the drug itself worldwide, or, to sign other partnerships. Finally, ARNA is absolved of marketing and selling costs. Eisai will pay to market, sell and distribute the drug. This is no small expense. Yet Eisai is also a good choice because they reach the target market ARNA needs to reach to make the drug a success while at the same time not being such a big company that it doesn't matter. Eisai will want to make the drug a hit.

  • Report this Comment On July 02, 2010, at 3:25 PM, majjamasti1 wrote:

    I absolutely disagree with Brian Orelli. In the critical economy like this you can not get better dal then ARNA got. I think you wanted to see big bucks before the approval in the tight credit market, then it is not possible. The big phama has theri own problems that they have to solve and beside they can not over-levrage getting into somethings they already failed. In my opinion ARNA under the time has the best deal. You have to wait and see. People like you put lots of presure on stock and stock don't move but then the credibility of ones wron opinion is questionable in the future momments.

  • Report this Comment On July 02, 2010, at 3:49 PM, PhillyDan wrote:

    Hey Brian, let me put it delicately back at you. Your article sucks wind like you do. Next time do some due diligence and realize that Eisai has been responsible for the sales and marketing of Aricept in the U.S. since 2005. Maybe when you learn to get your facts straight, maybe I would give you some street cred. But right now you are a hack that doesn't know anything. You don't even deserve the rebuttal of a reasonable response. See you in 2012, when Arena is 50+ and Vivus is sucking air...

  • Report this Comment On July 03, 2010, at 5:40 PM, Danosaur95630 wrote:

    Brian, the deal Eisai is a fantastic deal considering today's economic backdrop and it should be noted that Arena is the one and only firm in this competition that has obtained a partner. It is not surprising that Eisai would chose to back load the deal as a hedge, and the deal is very beneficial to both firms.

    I was very encourafed when Aisai announced a US marketing partnership for its late-stage obesity drug candidate lorcaserin. Aisai is known for gastrointestinal drugs, among others including the well-known alzheimer's drug Aricept, a perfect match for Arena.

    The deal is structured to reflect lorcaserin's risk profile relatively early in the game, that is, pre-approval. Lorcaserin will face an FDA advisory panel in September and receive an approval decision in October. For the moment, ARNA will receive only $50 million upfront from Eisai, a modest amount for a drug that analysts have been ballyhooing as potentially a $1B or more annual blockbuster. Milestone payments of up to $160 million then follow, mostly contingent upon approval and delivery. All this limits Eisai's risk during the approval and pre-launch manufacturing process.

    The back end of this agreement is heavily weighted in ARNA's favor if lorcaserin does get approved and begins sales: a $1.16B sales-related milestone payment could kick in, which is rich considering that Eisai's most recent US revenues in fiscal year 2009 were $3.9B. Eisai's purchase price to ARNA also steps up from 31.5% of sales to 36.5% of sales as sales volume rises.

  • Report this Comment On July 06, 2010, at 9:13 AM, BioBat wrote:

    In terms of up front milestone payments - yes it's a raw deal but you can't pick and choose what you're looking at, you have to look at the whole picture. As already mentioned, Arena essentially retains a huge chunk of the profits if Lorcaserin becomes a blockbuster drug in the Lo-Phen formulation, which seems like a slam dunk once approval goes through. Arena sacrificed big milestones for more ownership over the drug as its developed. That's called putting your money where your mouth is and should make Arena a lot of money in 3-5 years.

    All in all, a pretty good deal for a first partnership of a company that hasn't yet had a drug hit the market.

  • Report this Comment On July 06, 2010, at 11:51 AM, TMFBiologyFool wrote:

    How you look at this deal has a lot to do with your feelings on the ability to get lorcaserin approved and prescribed in large quantities. You all have a lot more confidence in the drug than I do.

    -Brian

  • Report this Comment On July 07, 2010, at 6:18 AM, clawmann wrote:

    Brian: that's a little inconsistent isn't it?

    If you have little confidence that the drug will be approved (I believe it will), then Arena did a smart thing by taking $50 million before the approval decision. If you think the drug is likely to be approved but lack confidence that it will achieve significant market acceptance, again Arena did the smart thing because Arena gets "up to" $90 million on approval, making the potential total amount going into Arena's coffers a possible $150 million on approval.

    Neither of the other two candidates have landed a pre-approval marketing deal putting immediate cash in their coffers

    As for potential market acceptance, if approved I have no doubt that lorcaserin, because of the advantage of its safety profle, will likely be the first drug that a large majority of physicians will prescribe to see how the patient responds before considering either of the other two candidates.

    Apparently Eisai thinks similarly, or they would not have handed ARNA a $50 million cash payment pre-approval.

    And the post-approval royalty rate is very attractive.

    So i don't see any basis for the "Arena got taken" nonsense, unless you have some bias against Arena. Do you hold a position in one or both of its competitiors, the other two obesity candidates facing PDUFA in October or January?

  • Report this Comment On July 07, 2010, at 6:21 AM, clawmann wrote:

    Correction: the "$150 million" in the above should read "$140 million".

  • Report this Comment On July 14, 2010, at 8:50 AM, BioBat wrote:

    I have no doubt that lorcaserin's going to be approved. After that it's up to the marketing experts to talk up the wonders of it, and get it prescribed. With the degree of obesity in this country, that's like feeding candy to a baby even if competitor drugs make it to the market.

  • Report this Comment On October 17, 2010, at 11:57 AM, zzlangerhans wrote:

    Recent events have made it clear why Brian Orelli gets paid to write under his own name, while these responders got paid nothing to insult him under pseudonyms.

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